The money is being demanded as part of a review of all US aid for the Palestinians which began soon after the resistance group Hamas won last month's legislative elections. The US State Department expects to finish the review in the next few weeks.
Sean McCormack, the US State Department spokesman, on Friday said the caretaker government of Mahmoud Abbas had agreed to return the $50 million, which was given to the Palestinian Authority last year for infrastructure projects after Israel's withdrawal from Gaza and parts of the West Bank.
"In the interests of seeing that these funds not potentially make their way into the coffers of a future Palestinian government (made up of Hamas) ... we have asked for it to be returned and the Palestinian Authority has agreed," McCormack told reporters.
Over the past decade, the United States has given about $1.5 billion in aid to the Palestinians. Most of that was channeled via nongovernmental organisations.
Israel's interim prime minister has meanwhile decided to wait until after Hamas assumes control of the Palestinian parliament before ordering any tough new restrictions on the Palestinians.
Officials said Ehud Olmert put off until Sunday's cabinet meeting a proposed ban on Palestinian workers and funding after the United States and the European Union cautioned against taking steps that might make life more difficult for Palestinians.
Foreign Ministry spokesman Mark Regev said Israel was now in "watch and wait mode" to see what positions Hamas would take on Saturday after the swearing-in of a parliament dominated by the Islamic group, whose charter calls for the destruction of the Jewish state.
"In the interests of seeing that these funds not potentially make their way into the coffers of a future Palestinian government (made up of Hamas) ... we have asked for it to be returned"
US State Department spokesman
"We're waiting to see what happens tomorrow in Ram Allah and we will respond to that," Regev said.
Government sources said Olmert decided to delay a decision until Sunday after disagreements emerged between some of his top advisers over what measures should be taken against Hamas.
Olmert was expected to adopt most of a Defence Ministry proposal that would bar Palestinians from working in Israel or travelling between Gaza and the West Bank starting on Sunday, one day after the Hamas-led parliament is sworn in.
The plan also calls for halting more tax revenue transfers to the cash-strapped Palestinian Authority to pressure Hamas to renounce violence, recognise the Jewish state and abide by interim peace deals.
Israel would also freeze plans to build a Gaza seaport and rebuild its airport. Under interim peace deals, Israel, which withdrew from Gaza last year, still controls its airspace and coastal waters.
"What's important is that the Palestinians realise the consequences of their vote," said a senior Israeli source, speaking on condition of anonymity because Olmert has yet to announce his final decision.